Financial Disaster Risk Management: CATSIM Model

As of January 2006 the RMS program has changed to the Risk and Vulnerability program.

Historically, a substantial part of the losses due to disasters in developing countries have been financed by relying on diversions from the budget, as well as loans and donations from the international community. As this strategy involves considerable uncertainty with regard to the availability and timeliness of necessary funds, emphasis is being put on financial planning. This pre-disaster research activity will further develop the RMS model framework (CATSIM) to assess the financial vulnerability of the public sector to extreme events in hazard-prone developing countries and to illustrate the tradeoffs and choices a country government must make in managing the economic risks due to natural disasters.

RMS research on financial vulnerability is based on a study carried out for the Natural Disasters Management Network of the Regional Policy Dialogue of the Inter-American Development Bank. For the first time, an approach has been developed and applied to identify countries with a potential financing gap (representing the financial vulnerability to extreme events), that is, countries where disasters have the potential to swamp the governments ability to finance the recovery process.

RMS's CATSIM (CATastrophe SIMulation) can assist policy makers in developing public financing strategies for disaster risk. The models shows the respective costs and consequences of financing alternatives on important indicators, for example, economic growth. The model is equipped with a graphical interface that allows the user to change default parameters defining hazards, vulnerability and the elements exposed. There are two modules: the first assesses risk, the second shows the costs and benefits of different strategies to manage risk. Since the user can interactively change important parameters and assumptions, financial strategies are shown in a transparent fashion. A later version will allow to also calculate an optimal mix of ex-ante and ex-post measures by solving a multistage stochastic optimization problem.

A first stakeholder workshop sponsored by the World Bank's Hazard Management (HMU) and the ProVention Consortium, and jointly organized by the HMU and IIASA on The Financial Management of Disaster Risks was held at IIASA from April 21-23, 2004. Policy makers and practitioners from Colombia, Mexico, India, the Philippines, and Turkey interacted with IIASA and World Bank staff and consultants. The purpose of the workshop was to exchange insights and practice on loss-mitigation and pre-disaster financial strategies for reducing the vulnerability of the public and private sectors to the economic losses of disasters. Each of the participating countries is advanced in pre-disaster financial planning, or is considering developing advanced schemes.

The workshop demonstrated that CATSIM has significant practical application for building the capacity of policy makers to evaluate ex-ante financial instruments, including insurance, catastrophe bonds, contingent credit arrangements and other disaster hedges, and compare their benefits with investments in loss reduction.

RMS will build on the success of this approach by improving CATSIM and adapting it to the needs of client developing countries. Negotiations are underway to carry out this research for selected disaster-prone countries and to organize scoping workshops in these countries.

Paper at XIII. Annual Conference of European Association of Environmental and Resource  Economics, Budapest, June 2004

For more information, contact Reinhard Mechler

Responsible for this page: Karolina Werner
Last updated:02 Jan 2006